Question

Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer's home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,750 and sells the remote separately for $100, and offers the entire package for $1,900. VP does not sell the installation service separately. VP is aware that other similar vendors charge $150 for the installation service. VP also estimates that it incurs approximately $100 of compensation and other costs for VP staff to provide the installation service. VP typically charges 40% above cost on similar sales Required: 1. to 3. Calculate the stand-alone selling price of the installation service using each of the following approaches. Stand-Alone Selling Price Adjusted market assessment Expected cost plus margin Residual

Answer 1

1. Under the adjusted market assessment approach, Video Planet would base is estimate ofthe stand-alone selling price of the installation service on the prices charged by other vendors for that service, adjusted as necessary. Given that the other vendors are similarto Video Planet, no adjustments are necessary. Therefore, Video Planet would estimate the stand-al one selling price of the installation service as $150 i.e. the amount charged by competitors for that service Under the expected cost plus margin approach, Video Planet would base its estimate ofthe stand-alone selling price of the installation service on the $100 cost it incurs to provide the service plus its nomal margin of 40%; $100 x 40%= $40. Therefore, Video Planet would estimate the stand-alone selling price ofthe installation service as $100 $40 $140 2. Under the residual approach, Video Planet would base its estimate of the stand-alone selling price of the installation service on the total selling price of the package $1,900 less the observable stand-alone selling price of the TV $1,750 and remote $100. Therefore, Video Planet would estimate the stand-alone selling price ofthe installation service would be $1,900 -($1,750 $100) - $50 3.